Introduction: BoE and ECB setting interest rates
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
One down, two to go. It’s the Bank of England and the European Central Bank’s turn to set interest rates today, a day after the US Federal Reserve cheered investors with a clear signal it will cut rates next year.
Like the Fed, both the BoE and the ECB are very likely to leave interest rates on hold today.
But (also like the Fed) the focus will be on how quickly Europe’s major central banks will cut borrowing costs next year.
The money markets are indicating that ‘no change’ from the BoE at noon today is a 94% near-certainty, which would leave rates at a 15-year high of 5.25%
After all, UK inflation is more than double the Bank’s 2% target (at 4.6% in October). And after wage growth slowed in the last quarter, the Monetary Policy Committee will want to see more signs of easing price pressures.
But looking into 2024, the markets now expect UK rates to be cut by a full percentage point by the end of next December, to 4.25%. Yesterday’s news that the UK economy shrank in October has raised fears that Britain could be sliding into a recession
For the European Central Bank, the inflationary picture a litte more pleasing – consumer prices in the eurozone only rose by 2.4% in the year to November.
The ECB is expected to leave its deposit rate unchanged at 4.0%, while its inflation expectations could be revised down in the latest macro forecasts drawn up by its staff.
Last night, the Dow Jones industrial average closed at a record high, as traders cheered the news that most Fed policymakers expect US interest rates to be cut three times in 2024.
This has bolstered hopes that the US can avoid a recession, as Jim Reid, strategist at Deutsche Bank, explains:
Yesterday’s FOMC meeting did its best to give investors an early Christmas present, all packaged with a bow and extra special gift wrapping. In turn this added more fuel to the soft landing narrative.
European markets are set to rally today too, with the FTSE 100 index forecast to rise almost 1%.
In a busy day for central banks, Switzerland and Norway are also setting rates today.
The agenda
8.30am GMT: Swiss National Bank interest rate decision
9am GMT: Central Bank of Norway (Norges Bank) interest rate decision
12pm GMT: Bank of England interest rate decision
1.15pm GMT: European Central Bank interest rate decision
1.30pm GMT: US retail sales for November
1.30pm GMT: US weekly jobless claims
1.45pm GMT: European Central Bank press conference
Key events
The weakness of the US dollar has pushed the pound up to its highest level in almost two weeks, at $1.266.
US dollar hits four-month low
The US dollar has dropped to a four-month low this morning, after the Federal Reserve signalled that US interest rates have peaked, and will fall in 2024.
The selloff has pushed the US dollar index (which tracks the $ against a basket of currrencies) to its lowest since mid-August, at 102.42 points.
Ricardo Evangelista, senior analyst at ActivTrades, says:
While there had been some persistent doubts about the Fed’s interest rate hikes, it has now become clear that the current cycle is over. Investors now want to know when the central bank will start cutting rates and how fast they will come down.
Speaking at the end of the two-day meeting, Jerome Powell began to lift the veil over the likely path for rates in 2024. This development was welcomed by the financial markets, dissipating some of the doubts that had been capping risk appetite.
Treasury yields fell, as did the US dollar, as investors priced in expectations of a rate cut as early as March, in a dynamic that may lead to further losses for the greenback.
Goldman Sachs are predicting the Bank of England will cut interest rates sharply in 2024, down to 3.75% by the end of the year.
That would imply six quarter-point rate cuts, or a smaller number of larger cuts (or a mix of the two).
Gurpreet Gill, macro strategist global fixed income at Goldman Sachs Asset Management, predicts the first cut will come next May, saying:
“Momentum in UK economic activity has stalled, with weakness across most sectors including consumer-oriented services—a pivotal driver of growth.
“We have also seen a noteworthy deceleration in wage pressures.
“The confluence of sluggish growth momentum and abating underlying inflation pressures mean we expect the Bank of England to initiate rate cuts from May 2024.
“We expect further easing throughout the year, culminating in a Bank Rate of 3.75% by the end of 2024.”
Surprise interest rate rise in Norway
Newsflash: Norway’s central bank has raised its benchmark interest rate by 25 basis points to 4.50%, surprising many investors.
Norges Bank lifted borrowing costs as it battled inflation, and says the policy rate will likely be kept at that level for some time ahead.
This rather bucks the wider mood in the markets towards rate cuts.
Governor Ida Wolden Bache explains:
“We see that the economy is cooling down, but inflation is still too high. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5 percent for some time ahead.”
Of the 27 economists polled in advance by Reuters, 15 had expected rates to stay on hold on Thursday while a minority of 12 had forecast a hike to 4.50%.
This weekend will mark the second anniversary of the Bank of England’s first interest rate hike since the pandemic.
On 16 December 2021, the BoE nudged up base rate to 0.25%, from the record low of 0.1%.
That proved to be the first of 14 rate hikes, which brought rates to their current 15-year high of 5.25% in August.
New data from Moneyfacts shows how this has driven up mortgage rates:
Since the start of December 2021, the average two-year fixed rate has risen from 2.34% to 6.04% and the average five-year fixed rate has risen from 2.64% to 5.65%.
On a 10-year fixed rate mortgage, the average rate has risen from 2.97% to 5.96% since December 2021.
The average standard variable rate (SVR) stands at 8.19%, up from 4.40% in December 2021.
Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, says:
“The past two years have proven to be an unprecedented period of interest rate volatility for mortgages.
Those coming off a fixed rate deal and wishing to fix once more will likely have to cover a much higher mortgage repayment, with the average two-year fixed rate more than double what it was in December 2021.
The lingering cost of living crisis could also be playing havoc with first-time buyers’ ability to get a foot on the property ladder, and affordable housing remains in short supply. Borrowers feeling the squeeze would be wise to seek help before they fall behind on their repayments and lenders will need to work closely with customers to support them moving into 2024.
Almost every member of the FTSE 100 index is up this morning, showing the breadth of the rally.
A rare faller is weapons maker BAE Systems (-2.2%), while Primark owner AB Foods are down 0.6% and energy producer/supplier Centrica are down 0.1%.
2024 will be a year of interest rate cuts by major central banks, says Investec economist Ellie Henderson.
Henderson says that Fed chair Jerome Powell had a change of heart last night, “akin to Scrooge eventually embracing Christmas”, when he revealed that rate cuts were being debated.
This “brought joy of equity and bond markets alike”, with both shares and bonds rallying on Wall Street last night, and in Europe this morning.
Henderson adds:
Focus now turns to the Fed’s peers, with the BoE and the ECB also deciding policy today.
The question is whether they take Fed Chair Powell’s dovish lead or tread more carefully. Interestingly the Swiss National Bank removed a reference to the possibility of higher rates in its statement this morning, having maintained its policy rate at 1.75%. Either way, in the absence of an unexpected shock, last night all but confirmed expectations that 2024 will be the year of the cuts.
Switzerland’s central bank has left interest rates on hold this morning.
The Swiss National Bank voted to maintain its policy rate unchanged at 1.75%, saying that while inflationary pressure has decreased slightly there is still high uncertainty.
It says:
The SNB will therefore continue to monitor the development of inflation closely, and will adjust its monetary policy if necessary to ensure inflation remains within the range consistent with price stability over the medium term
The SNB also warned that the growth outlook for the global economy in the coming quarters remains subdued, while inflationary pressure is likely to continue to ease.
Mohamed El-Erian, chief economic adviser at Allianz, says we shouldn’t expect the Bank of England or the European Central Bank to hint at hefty rate cuts next year, as the Federal Reserve did last night.
El-Erian posts on X (formerly Twitter) that:
Today we get the outcomes of the ECB and Bank of England policy meetings.
While both will follow the Federal Reserve in leaving rates unchanged, don’t expect President Lagarde and Governor Bailey to follow Chair Powell in opening the door wide open to sizable and early rate cuts in 2024 — and this despite the weaker economies in both jurisdictions relative to the US.
Shares are contining to climb in London, pushing the FTSE 100 index up by 169 points or 2.2% to 7717 points.
That puts the blue-chip index on track for its best day of the year (although we’re still early in the session…)
CMC: Santa comes early as Fed pivots.
Santa has come early to the financial markets, after the US Federal Reserve pivoted last night, and indicated that US interest rates will be cut several times in 2024.
The French and German stock markets have just hit record highs, as European shares jump – as we’ve seen in London already this morning.
Michael Hewson, chief market analyst at CMC Markets UK, explains:
It had been widely anticipated that Fed chairman Jay Powell’s main challenge yesterday would be in trying to push back on the idea that the US central bank was ready to cut rates sharply over the next 12 months. With the sharp fall in yields since November there was an expectation that the loosening in financial conditions might put the central banks fight against inflation at risk.
It was therefore quite surprising that yesterday’s statement and dot plots embraced that narrative, delivering an early Christmas present to the markets, returning the 2024 median for dot plots to 4.6%, back to where it had been in September, while forecasting core PCE to decline to 2.4%.
The US dollar sank, along with 2-year yields which fell 30bps to a 6-month low, gold surged back above $2,000 an ounce, and US markets pushed up to their highest levels this year, with the Dow posting a new record high, confounding market expectations of a hawkish pushback.
At the press conference Powell tried to give the impression that the Fed retained the option to hike rates again, however this message is rather undermined by the fact that the FOMC cut their dot forecasts as much as they did. The admission that the FOMC discussed rate cuts was also noteworthy.
If “higher for longer” wasn’t dead before last night, it certainly is now, and certainly makes the job of both the Bank of England, as well as the ECB later today that much harder in maintaining a hawkish bias,
The FTSE 250 index, which contains shares in medium-sized companies, has surged by 2.7% this morning to its highest level since the end of July.
Electricals chain Currys are among the top risers, up 10%, after it stuck to its annual guidance this morning despite reporting an adjusted pretax loss of £16m for the six months to October 28.
Like-for-like sales fell 4%, with the UK & Ireland down 3% and the Nordics down 6%.
FTSE 100 hits two-month high
London’s stock market is rallying hard at the start of trading, as investor cheer last night’s dovish words from the Federal Reserve.
The FTSE 100 index of blue-chip shares has jumped by 136 points, or 1.8%, to 7686 points, the highest level in two months.
Grocery technology firm Ocado are the top riser, up 7.6%, with mining companies also in the top risers, reflecting hopes that interest rates will be cut aggressively next year.
Investors are also predicting a flurry of US interest rate cuts next year:
US rates are now expected to fall by 1.5 percentage points in 2024 – or six quarter-point cuts….
*TRADERS PRICE 150BPS OF FED RATE CUTS IN 2024 FOR FIRST TIME
— IGSquawk (@IGSquawk) December 14, 2023
…., which is twice as much as the Fed policymakers predicted in the forecasts released yesterday.
Latest Fed dot plot. 0.75% of interest rate cuts seen in 2024 median. Three observations: 1) A coherent set of projections – with higher downside growth risks & recent soft price data providing an easing path; 2) Stubborn refusal to shift long term estimate for Fed Funds Rate… pic.twitter.com/QOLScaLiLu
— Simon French (@shjfrench) December 14, 2023
Markets expecting five BoE rate cuts in 2024
Newsflash: Investors are expecting the Bank of England to cut interest rates more aggressively next year.
The money markets are now indicating that UK interest rates will have fallen to 4% by the end of 2024. That implies five quarter-point cuts next year, rather than the four expected yesterday.
There’s already been central bank action in the Philippines, but it wasn’t really an interest rate thriller in Manila.
The Philippine central bank left its benchmark interest rate unchanged at 6.5% for the second meeting in a row.
Bangko Sentral ng Pilipinas governor Eli Remolona told a press conference the central bank deemed it necessary to keep monetary policy settings tight but was ready to adjust that if necessary.
ING’s Nicholas Mapa explains:
Remolona indicated that they would be monitoring the response of households and firms to tighter monetary policy, suggesting they would be waiting to see the impact of previous rate hikes on the inflation path. The central bank will likely extend its pause until inflation is “well-within” target and until inflation expectations are anchored.
We expect the BSP to be on hold well into 2024, with potential rate cuts only likely to be considered towards the end of next year.
Introduction: BoE and ECB setting interest rates
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
One down, two to go. It’s the Bank of England and the European Central Bank’s turn to set interest rates today, a day after the US Federal Reserve cheered investors with a clear signal it will cut rates next year.
Like the Fed, both the BoE and the ECB are very likely to leave interest rates on hold today.
But (also like the Fed) the focus will be on how quickly Europe’s major central banks will cut borrowing costs next year.
The money markets are indicating that ‘no change’ from the BoE at noon today is a 94% near-certainty, which would leave rates at a 15-year high of 5.25%
After all, UK inflation is more than double the Bank’s 2% target (at 4.6% in October). And after wage growth slowed in the last quarter, the Monetary Policy Committee will want to see more signs of easing price pressures.
But looking into 2024, the markets now expect UK rates to be cut by a full percentage point by the end of next December, to 4.25%. Yesterday’s news that the UK economy shrank in October has raised fears that Britain could be sliding into a recession
For the European Central Bank, the inflationary picture a litte more pleasing – consumer prices in the eurozone only rose by 2.4% in the year to November.
The ECB is expected to leave its deposit rate unchanged at 4.0%, while its inflation expectations could be revised down in the latest macro forecasts drawn up by its staff.
Last night, the Dow Jones industrial average closed at a record high, as traders cheered the news that most Fed policymakers expect US interest rates to be cut three times in 2024.
This has bolstered hopes that the US can avoid a recession, as Jim Reid, strategist at Deutsche Bank, explains:
Yesterday’s FOMC meeting did its best to give investors an early Christmas present, all packaged with a bow and extra special gift wrapping. In turn this added more fuel to the soft landing narrative.
European markets are set to rally today too, with the FTSE 100 index forecast to rise almost 1%.
In a busy day for central banks, Switzerland and Norway are also setting rates today.
The agenda
8.30am GMT: Swiss National Bank interest rate decision
9am GMT: Central Bank of Norway (Norges Bank) interest rate decision
12pm GMT: Bank of England interest rate decision
1.15pm GMT: European Central Bank interest rate decision
1.30pm GMT: US retail sales for November
1.30pm GMT: US weekly jobless claims
1.45pm GMT: European Central Bank press conference
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